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ADR gains of 1.8 percent. The transient business
(negotiated and retail) segment is down 4.0 percent, but
ADR is up 2.8 percent. Lastly group bookings are up 6.1
percent in committed room nights over the same time last
year, and ADR is up 3.2 percent. (TravelClick)
The TravelClick data is consistent with the experience of hotel
operators discussed above; the trend is primarily affecting
commercial travel. Leisure hotel use is still growing. The airline
industry is also optimistic, projecting to have carried a record 231
million passengers in the summer of 2016. Hotels are aggressively
courting leisure travelers with services, programs and experiences,
targeting children and families.
TRANSACTIONS MARKET
Hotel transaction volume in 2015 represented what may be
pointed to as the peak of the current cycle. Not only was the
volume notable in 2015, but the price per room was also
impressive, over 50 hotels sold for over $600,000 per room. The
hotel sector posted 42.0 percent growth in investment activity for
2015 over the prior year, on sales of $49.0 billion, second only to
the volume recorded in 2007.
The slowdown in all commercial real estate deal volume began in
the second half of 2015. In what is still being characterized as
“choppy,” total commercial real estate transaction volume is down
16 percent year over year in the first half of 2016. Hotel sales
volume fared the worst of all commercial real estate asset classes
with a decline of 50 percent over the first half of 2015. According
to the data from Real Capital Analytics (RCA), the majority of
transactions so far this year have occurred in the second quarter
of 2016 as hotel sales virtually stalled in the first quarter. The
downward trend in transactions in the first quarter of 2016 was a
continuation of the decline which began in the second half of
2015. While 2015 ended up as very strong transaction year, 42
percent of all deal activity in 2015 occurred in its first quarter.
Hotel REITs, which effectively withdrew from the market in
mid-2015, have continued to sit on the sidelines as buyers, with
some being more active as sellers. A major story for 2015 was the
growth of foreign investment activity in U.S. commercial real
estate. Private and sovereign fund investors from the Middle East
and China were active hotel buyers in 2015, and foreign
investment continues to be important for hotel transactions.
Institutional buyers and private equity groups, however, are
recognized as the leading acquirers of hotels in the first half
of 2016.
Manhattan remains the most active hotel transaction market in
terms of volume, and Chicago has crept up from number four to
number two. Washington, D.C. is now the third most active
market, and increases in sales activity in Boston and Miami have
propelled these destinations to numbers four and five. San
Francisco, a key target market for hotel investors for many years,
has plummeted to 23 out of 25. With heavy transaction activity in
the last six years, many hotels have recently traded hands and
these buyers are not yet strategic sellers. Replacing San Francisco
as more popular hotel acquisition markets are Seattle, Tampa and
Atlanta. Reflecting the softening of the transaction market, of
these three cities, only Seattle had a significant increase in hotel
investment activity, the other two markets actually had declines in
the overall hotel sales volume.
After a flurry of hotel transaction activity in recent years, markets
such as Dallas, Austin, San Diego, Orlando and Phoenix saw some
of the largest declines in transaction volume. Some of the markets
are still supporting strong performance fundamentals, however,
issues such as new supply, the energy economy, and the cost of
financing, have muted interest from investors. A summary of the
RCA transaction data is shown on the following page
Key Findings Include:
•
The public markets are causing REITS to be net sellers
given their low stock prices; the primary purchasers are
institutional buyers and private equity firms.
•
The volume of legacy CMBS hotel loans maturing in
2016 and 2017 is of concern to some rating agencies
as market fundamentals slow. However, many lenders
are anticipating to benefit from the need for debt and
are actively poised to pursue refinancing or extension
transactions.
•
CMBS lenders continue to curtail new lending activity
relative to recent years due to shifting spreads and
regulatory requirements. The newly required risk retention
rules oblige banks that underwrite CMBS offerings to hold
on to some of the debt, an attempt to align their interests
with those of their investors. 2016 will be a down year for
CMBS. Trepp estimates that U.S. CMBS lending will total
just $50 billion this year, down from $97 billion in 2015
and the lowest volume since 2013. Volume is well below
2007 levels, when CMBS lending hit $206 billion. With
the general consensus being that financing is available
for existing performing assets, other lenders, including
insurance companies, private equity, and commercial
banks, continue to close some of the debt gap.
•
On a global note, the impact of Brexit is still unclear
though some overseas investors are eyeing real estate in
the U.S. gateway – and even secondary markets – as more
stable investments. Hotel buyers may bypass London and
major European cities in favor of U.S. properties.
•
Capitalization rates for full-service hotels were generally
flat from 2013 to the second quarter of 2015, averaging
7.6 percent. In the second half of 2015 and through
the first quarter of 2016, average capitalization rates
increased about 50 basis points. Data for the second
quarter 2016 shows capitalization rates returning to prior
levels as transaction volume improves. For select-service
hotels, capitalization rates show a similar trend with
an approximately 100 basis point spread to full-service
transactions.